IAS 16 and IAS 38 — Clarification of acceptable methods of depreciation and joint venture

Date recorded:


In December 2012 the IASB published for comments the Exposure Draft Clarification of Acceptable Methods of Depreciation and Amortisation (ED/2012/5), which contains a proposal to amend IAS 16 Property, Plant and Equipment and IAS 38 Intangible Assets. More specifically, the IASB proposes to prohibit a depreciation or amortisation method that uses revenue generated from an activity that includes the use of an asset.

Around half of the respondents expressed conditional agreement on the proposal however issues were raised around the following:

  • the guidance in the standards,
  • use of revenue as a proxy for consumption,
  • the meaning of the term “consumption of economic benefits” being unclear,
  • the proposed guidance in regards to the application of the diminishing balance method is confusing,
  • the proposed guidance should not be applied on a retrospective basis,
  • the statement “when it was acquired” in paragraph 62A of IAS 16 and in paragraph 98A of IAS 38 should be deleted.

Less than a third disagreed as they found the proposals too prescriptive and rules based rather than principles. They also found the current guidance banning the use of revenue based methods as revenue is measure of output as opposed to a measure of consumption of economic benefits and prices changes within revenue are not directly linked with the consumption of related assets.

Less than a quarter agreed as they thought the proposal clarified the requirements in IAS 16 and IAS 38.

At this meeting staff recommended that the use of a revenue based method should be prohibited in all circumstances thereby removing the description included in the BC of the limited circumstances in which revenue dates would be correlated with production date.

Certain members agreed with the recommendation but wanted to understand why the use of revenue as a basis should be discontinued. Other members disagreed with the recommendation and concerns were raised about particular situations where revenue may be a proxy and the outright banning of it may cause problems, examples given included cinemas. A Committee member also highlighted that this was a shift away from “Accounting Principles” and by deleting the paragraph; a rule was effectively made which is definitive and therefore unsuitable. Members suggested allowing limited use of such a basis within given circumstances and therefore emphasised on focusing on the underlying principle (that depreciation/amortisation is an estimate and a measure of the consumption of benefits as oppose to the generation of economic benefits). In addition, preparers of financial statements should exercise professional judgement around decisions that are appropriate with the calculation of amortisation when using revenue as a proxy.

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